An advertisement came across my Facebook feed recently for a Masterclass on “economics and society” taught by Nobel Prize-winning economist Paul Krugman. If you have $90.00 you’d like to waste you can do so on this, otherwise you’re better off saving your money. I’d sooner pay Larry King to teach me the secrets of a successful long-term marriage.
To be sure, few people have been more wrong, more often, and more loudly on any topic than Krugman has been on economics. If Krugman should teach a Masterclass on anything, it should be on making historically indefensible predictions and recommendations. What follows are five of the more ridiculous ones:
- 1998: Krugman predicted the Internet would have no greater impact on businesses than the fax machine.
The Internet was not a new thing in 1998. AOL already had over ten million users by then, and 40 to 50 million people worldwide were using the Internet. Amazon.com and Yahoo.com had been founded four years earlier, eBay was already two years old, and most major retailers had some online component. By 1998, 10% of consumers reported they were “very or somewhat likely” to shop online that year, with every indication being that this would be a trend that would increase, not a disappearing fad, especially considering that online stores had four competitive advantages over retail: almost all of these transactions were tax free, there was a much greater selection, it was a much faster experience, and it allowed the user to stay home. The growth of Internet sales, and the existential threat it would pose to retail, should have been apparent to anyone who had every shopped for anything.
But Krugman had a different take on the matter, saying “The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
Great prediction, because by 2005, online retail sales had jumped to $91,474,000,000 annually in the United States alone. Today, U.S. retail sales approximate $400 billion, retail stores are falling like flies, shopping malls all over the country are closing their doors, and the fax machine is almost entirely obsolete. If U.S. Internet shopping was its own country, it would today be in the top-30 in national GDP.
It’s amazing that someone can win a Nobel Prize in economics and totally whiff on the single most important economic development in history, and right as it was occurring. It would be like a meteorologist seeing a giant swirling hurricane cloud almost directly over a city, and declaring a likelihood of only moderate winds and a slight chance of rain.
- 2002: Krugman claimed the Enron scandal would have a greater impact on American life than 9/11
Krugman: “One of the great clichés of the last few months was that Sept. 11 changed everything. I never believed that. An event changes everything only if it changes the way you see yourself. And the terrorist attack couldn’t do that, because we were victims rather than perpetrators. Sept. 11 told us a lot about Wahhabism, but not much about Americanism… I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.”
This prediction falls flat on its face because it is based on a false premise. No, an event does not need to change how you see yourself in order to be a “turning point.” Pearl Harbor did not cause much introspection, neither did the assassination of Archduke Franz Ferdinand, but they changed the course of world events. So did the Great Depression. So did any number of other things that changed the world around us, regardless of whether we changed how we saw ourselves.
Now, to be sure, the Enron scandal was no banner moment in American history.
It was basically an accounting scandal: Enron, an energy company, inflated its earnings by counting expected future earnings from technology investments as money that was effectively already earned. For example, it would build a new power plant, estimate its profits, and instantly put those profits on its books as though they had been earned, when they hadn’t made a penny. When these investments lost money, the company hid the losses from investors by placing them off the balance sheet using accounting gimmicks, with the help and approval of its accounting firm, Arthur Anderson. This house of cards eventually fell, putting Enron into bankruptcy, Arthur Andersen out of business, and two people in jail. Nobody died, except Enron CEO Ken Lay, who was convicted of fraud, but died of a heart attack while awaiting sentencing.
The only significant legislation resulting from this was the Sarbanes-Oxley Act, which increased penalties for defrauding shareholders, and for destroying, altering or fabricating financial statements.
Meanwhile, 9/11 killed 4,000 Americans, launched two wars (one of which continues to this day, and has become the longest war in American history), which have resulted in tens, if not hundreds of thousands of deaths, brought President Bush a second term, President Obama a first term, cost over $2 trillion and counting, brought about the Patriot Act, and has rewritten the entire American foreign policy playbook.
It’s kind of hard to juxtapose the two and find any meaningful comparison.
Enron arguably wasn’t even the most significant financial story of its era, the honor of which could just go to Bernie Madoff, or the bursting of the housing bubble.
And speaking of which…
- 2002: Krugman said the Federal Reserve should deliberately create a housing bubble
Krugman: “The recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
So Krugman not only did not learn anything from the NASDAQ bubble that had just burst and wiped out $5 trillion in wealth, he demanded the Greenspan replicate precisely that!
What could possibly go wrong? Inflating prices by artificially lowering interest rates and putting people into homes they cannot afford sounds like a recipe for success if ever there was one!
What went wrong is that the new bubble that Greenspan would create was even bigger, and in the one industry that affects all Americans. When it burst, as all bubble inevitably do, it would destroy $10 trillion in wealth, and bring the entire global economy to the precipice of total collapse.
Three years after the original quote, in 2005, Krugman revisited this advice, expressing some reservations, saying “Although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end… That’s why it’s so ominous to see signs that America’s housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble… The important point to remember is that the bursting of the stock market bubble hurt lots of people… So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it’s hard to imagine what that might be. After all, the Fed’s ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what’s left? … The Fed does seem to be running out of bubbles.”
So even though he recognized that the bubble idea was snowballing out of control, and imperiled the entire economy (notice he calls his own bubble a “speculative” one, as though the consumers are causing the problem, and he had no hand in this), his recommendation was not to deflate it, but accept that it will burst and “hurt lots of people,” and to simply create another bubble, somewhere, because bubble creating is the only tool the Fed has at its disposal to manage the economy.
Perhaps, then, a better plan is to not have the Fed managing the economy, and let prices be dictated by supply and demand.
- 2006: Krugman praised the Veterans Health Administration as an example of how great government-run healthcare is.
Krugman: “I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system — it runs the hospitals and clinics… The veterans’ system has managed to avoid much of the huge cost surge that has plagued the rest of U.S. medicine.”
Krugman has a history of praising the Veteran’s Administration as having “led the way in cost-saving innovation,” probably because he’s not a veteran who’s ever had to make use of it.
And I suppose he is right, at least about the costs. The VA has a very innovative way of keeping costs low: they simply deny coverage to people who need it!
Within three years of authoring the “cost-saving innovation” quote, the Veteran’s Administration was the subject of perhaps the greatest healthcare fraud scandal of all time, when it was revealed that patients could not even get appointments with physicians within fourteen days, and some died while on the waiting lists. At the Phoenix facilities alone, 1700 veterans were found waiting an average of 115 days for a doctor’s appointment, and 40 died while waiting. In Fort Collins, Colorado, as many as 6,300 veterans treated at the outpatient clinic waited months to be seen for treatment.
Later, an internal audit found that more than 120,000 veterans nationwide were either left waiting, or never got the care they needed, and 344,000 medical claims were backlogged. If treatment was denied, as it often was, appeals were taking an average of 1598 days.
By all means, let’s replicate this model on a national scale!
To cover this up, the VA hospitals nationwide were found to simply be falsifying documents, as though part of a coordinated effort.
The reason for the delays in treatment was that facilities were understaffed, because since VA-eligible patients pay less than market value for VA services (with many veterans qualifying for cost-free health care services, and many others receiving significant discounts), the demand is higher for its services than it would be if market prices allocated resources efficiently. But the money the VA gets is not correlated to the amount of care it needs to provide. It just gets whatever Congress gives it. So to keep costs down, fewer people than required were hired.
And that’s the socialism paradox: socialism redistributes wealth to reduce costs to consumers, but reducing costs to consumers results in consumers buying more of whatever is being subsidized, creating shortages of resources, which requires more laborers to provide it, which drives the costs back up. And when those costs can’t be met, the solution is rationing.
Additionally, since the VA is not a private company and nobody cares about the dollars and cents, it spent at least $92 million on overpriced medical supplies, despite Krugman’s claim that the VA is so cost efficient because “the veterans health system bargains hard with medical suppliers.”
I guess not!
It was also discovered that there were “over 10,000 pending appointments for prosthetics,” a “lack of consistently clean storage areas for medical supplies and equipment,” and it was noted that “patients received unnecessary anesthesia when scheduled procedures were delayed to track down or borrow items.” This was attributed to the “unwillingness or inability of leaders to take responsibility for the effectiveness of their programs and operations.”
But why should they care? It’s not like they have shareholders to answer to.
And these are precisely the sorts of problems that those of us who oppose socialized medicine fear, and are ridiculed for, even though we are proven right every single time.
It is probably true that market capitalism might not be as efficient in the medical marketplace as it is elsewhere (in large part because politicians put so many regulations, restrictions, and requirements on it), but that does not make socialism any more effective than it normally is, or any less likely to produce, as it always does, shortages, rationing, and uniformly poor customer experiences.
So Krugman is right when he says that the Veteran’s Administration provides us with “home-grown evidence about what works and what doesn’t.” He should familiarize himself with it.
- 2013: Krugman argued that the United States should print a $1 trillion coin to pay the national deficit.
Krugman: “Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely… There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.”
Well, wait a minute. If we can pay our bills by just minting $1 trillion coins “while doing no economic harm at all,” why should anyone pay taxes? Or work, for that matter?
Because this has been tried. Ask Venezuela, or Weimar Germany, or Yugoslavia, or Zimbabwe, how paying bills by minting money out of thin air works out.
Money has to represent the value of goods and services produced. If you’re just adding new money to the economy that is not reflective of an increase in goods and services produced, you’re just devaluing the currency.
In a separate blog post that was linked to the one cited above, Krugman argued that “The coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back.”
But why would the government want to buy it back? It’s not a legal debt like a Treasury note that has promised the borrower a return of the principal plus interest. There is no borrower, except the government itself.
And how would the government buy it back if the coin is used to pay the expenses of the government? If the Treasury had the money to buy it back, it would not need to mint it in the first place. The entire point of creating this coin out of thin air is that the Treasury does not have the money to pay a $1 trillion deficit. And this deficit isn’t just an academic exercise, solvable by an accounting gimmick. The deficit consists of a list of bills that have to be paid. Once the Treasury mints the coin and puts it on deposit with the Federal Reserve, the money would be distributed to the various government programs and recipients whose costs comprise the deficit. And once distributed, it’s gone. So the government can’t just undo the deposit, put the coin back in its other pocket, and melt it.
The government would therefore need new money, but where would that come from? $1 trillion in spending cuts? Unlikely, since the inability to cut anything is why we had the $1 trillion deficit in the first place. And yes, there’s something desperately wrong with a government that can take a country to war much more easily than it can cut a nickel out of its budget, but that’s a topic for another day.
What about $1 trillion in tax increases? Aside from that being politically problematic (again, if we could do that, why are we talking about $1 trillion coins?), any additional revenue the government would take in would just get spent on government programs. Politicians use money to buy votes, not pay debts, which is why we have such a large one.
What about $1 trillion in new borrowing? Well, that defeats the purpose of buying back the coin in the first place. Why take out a loan from someone else that will have to be paid back with interest, just to pay back an interest-free loan from yourself, the value of which decreases with inflation? That makes no sense.
And that just leaves one solution: Mint another $1 trillion coin. Brilliant.
Look, not to pick on the guy, Paul Krugman is not an economist, he is a liberal activist who uses his economic credentials to advocate for liberal policies. There is a reason he named his New York Times column “The Conscience of a Liberal,” which, by the way, appears in the banner above every one of his essays, lest anyone forget what they’re really reading. It’s not an economic analysis, it’s issue advocacy using economic jargon. That’s it.
And being a committed leftist is apparently enough for the Nobel committee these days. Hey, if Nobel Peace Prizes can be awarded to President Obama for dropping 26,000 bombs in a year (one every twenty minutes), and Yassar Arafat for pausing his terrorist activities for a few minutes, and Al Gore for bringing peace to… I think the weather, or something… then it makes sense that the Nobel Prize in Economics should be rewarded to someone who missed the greatest economic innovation in history right as it was happening, who thought an accounting scandal would have a greater impact on national life than the entire War on Terror, who, after we were thrown into recession when the tech bubble burst, demanded the creation of the housing bubble that nearly caused the entire global economy to collapse (and then demanded more bubbles on top of that), who thinks the most dysfunctional healthcare system in the world is a good model for government run healthcare, and whose monetary policy is modeled after Zimbabwe’s.
None of which is to say that Krugman is an unintelligent man. Far from it. He obviously has a brilliant mind. But as Ronald Reagan once observed, the problem with liberals is not that they are ignorant, it’s that they know so much that isn’t so.